Why has the European Commission decided to adopt a Recommendation, which
is not legally binding, and not proposed a Directive?

The objective of the Commission in proposing new principles on sound
remuneration policies in the financial services sector is to ensure that
remuneration policies are consistent with effective and sound risk management. A
Recommendation allows the Commission to adopt principles which are sufficiently
detailed so as to provide some guidance on the structure of remuneration
policies, and thus to react rapidly and efficiently in the context of the
current crisis. The principles do not touch on the level of pay from the social
and labour law perspective, as they are not intended to prescribe particular
levels or designs of individual remuneration. A Recommendation allows the
Commission to provide a framework for setting out principles or best practices.
It enables the Commission to adopt general principles applicable to the entire
financial services industry across a range of different financial institutions
which differ in goals, activities and culture. The measures to be taken by
Member States following the Recommendation could be tailored to each particular
sector of activities.

How does the Recommendation relate to the future legislative proposals
announced in the Commission Communication of 4 March to the Spring European
Council?

The Recommendation will be followed by legislation on the supervisory review
of remuneration policies, as mentioned in the Commission Communication of 4
March to the Spring European Council. The legislative proposals should introduce
a binding obligation for financial institutions to have in place sound
remuneration policies, and should focus on the supervisory review and on the
range of measures available to the supervisors in order to ensure that financial
institutions comply with this requirement. In this context, the principles set
out in the Recommendation will be highly relevant. They will provide guidance to
financial institutions as to how this binding obligation could be met, and a
framework for supervisors when assessing firms' remuneration structures.

In mid-June the Commission will address remuneration policy in banks and
investment firms (this is where the clearest market failure has occurred on the
basis of the evidence available to date) through the package of modifications of
the Capital Requirements
Directive[1]. The legislative
changes that will be proposed will bring remuneration policies and their link
with risk management clearly within prudential oversight in the supervisory
review process under that Directive. Credit institutions and investment firms
will be legally obliged to have remuneration policies that are consistent with
effective risk management, and supervisors will be able to take measures to
address any failures by credit institutions and investment firms in this regard.

Why does the Recommendation not apply to fees and commissions?

The objective of the Recommendation is to introduce principles on
remuneration policies within financial institutions in order to reduce perverse
incentives and excessive risk-taking by individual staff. Fees and commissions
paid to third parties fall outside the scope of this objective. Indeed, these
fees and commissions could in some cases create perverse incentives for service
providers, especially by encouraging them to maximise their own results and act
against the client's interests. However, the compensation practices relating to
such fees and commissions are already partially covered by special regimes, in
particular the Markets in Financial Instruments Directive (2004/39/EC) and the
Insurance Mediation Directive (2002/92/EC).

What categories of financial institutions are covered by the
Recommendation?

The Recommendation applies to all actors in the financial services industry,
regardless of the legal status of the financial institution. This includes
credit institutions, investment firms, insurance and reinsurance undertakings,
collective investment schemes, pension funds and other institutions with
professional activities in the financial services industry. However, the
Recommendation only applies to institutions who exercise activities of the
financial sector on a professional basis. This excludes those institutions that
perform such activities only occasionally or on an ancillary basis.

Why does the Recommendation cover only staff whose activities have
material impact on the risk profile of the financial institution?

One of the main problems identified regarding the remuneration policy in the
financial services sector was that remuneration policy was not sufficiently
aligned with risk tolerance of the financial institutions. It induced excessive
economic and financial risk-taking not only by key executives and senior
management, but also on the lower level of the financial institution, such as
sales and trading. Therefore, it is important that principles on sound
remuneration policies should apply to those staff members who perform activities
which have a material impact on the risk profile of the financial institution.
Applying the same principles to staff whose functions do not have any impact on
the risk profile of the financial institution is not necessary in order to
achieve the objective and could result in an unjustified administrative burden
for financial institutions.

Since this is a Recommendation, Member States are free to decide whether
to implement it or not. What would the Commission do if a majority of Member
States did not follow the main lines of the Recommendation?

Since this is a Recommendation, the Commission will not be able to open
infringement proceedings against those Member States that do not implement it.
The Commission nevertheless invites Member States to inform it by 31 December
2009 of what they are doing to promote the application of the Recommendation.
That will allow the Commission to monitor closely the situation within the EU
and to assess whether greater convergence of remuneration practices has been
achieved, and to report on this basis to the Council and to the European
Parliament.

[1] Directive 2006/48/EC of
the European Parliament and of the Council of 14 June 2006 relating to the
taking up and pursuit of the business of credit institutions, OJ L 177,
30.6.2006, p. 1.